Next week, the U.S. Supreme Court will decide the fate of sales taxes on internet purchases. In the 1960s, the Supreme Court limited state sales tax collection power to individuals and businesses with a physical presence, either themselves or property, in the state. This was reaffirmed, with some misgivings, in the 1992 Quill decision.
Since then, this “physical presence” rule has eroded almost completely in the areas of business taxes (many states taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. businesses if they merely have in-state customers), has caused chaos in the area of individual taxation (states increasingly are using one-time and transient visits to the state as the basis for demanding income tax), and has been outright challenged in the area of sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. (31 states now have laws collecting sales tax from internet firms with no physical presence in the state).
As the author of a note back in law school eleven years ago worrying about what would follow if the physical presence rule disintegrated, I’ve watched developments over the last decade with unease. States are becoming more aggressive in their interstate tax collections, and hardly a week goes by without a taxpayer calling me with some tale of horror. Trucks stopped at the state line. Years of back taxes after changing planes in the state. The entire business hit with a tax bill because someone browsed a trade show. Massachusetts and Ohio claiming that they can tax any company if their website puts a browser cookie on an in-state computer.
Congress has currently stalled on various proposals (Mobile Workforce, Business Activity Tax Simplification Act, Remote Transactions Parity Act, and others) that would restore balance to state tax powers and avoid burdens on interstate commerce. Each of these proposed bills rolls back a currently asserted state tax power and establishes a bright-line standard based, not on physical presence, but on that balance between tax collection and compliance burden. Mobile Workforce would limit state income tax collection to only those in the state for 30 days or longer, BATSA would define the level of activity that gives rise to business taxes, RTPA would require states to simplify their sales taxes before they could collect sales taxes on internet transactions, and so forth.
This is the background for the South Dakota v. WayfairSouth Dakota v. Wayfair was a 2018 U.S. Supreme Court decision eliminating the requirement that a seller have physical presence in the taxing state to be able to collect and remit sales taxes to that state. It expanded states’ abilities to collect sales taxes from e-commerce and other remote transactions. case, which will be argued before the Supreme Court on April 17 and decided this summer. South Dakota passed a law requiring internet sellers to collect the state’s sales tax when they sell to South Dakota residents, in return adhering to simplified and uniform sales tax rules and banning retroactive tax collection. The lower court struck down the law as violating the Quill decision. In January, the Supreme Court agreed to hear the case, their first sales tax authority case since 1992. Fifteen briefs have been filed in support of South Dakota, including by the United States government. Twenty-three briefs have been filed in support of Wayfair. (I’ll write more soon, summarizing many excellent arguments from these briefs.) The Tax Foundation submitted a brief in support of neither party, making the case for a meaningful limit on state taxing power while agreeing that South Dakota’s law doesn’t burden interstate commerce.
Only Justices Kennedy and Thomas remain from the Quill Court; both joined Justice Scalia’s concurrence grudgingly preserving the Commerce Clause prohibition from the 1960s entirely because of reliance interests. (Justice Scalia shared Justice Thomas’s, and perhaps Justice Gorsuch’s, skepticism of judges having any power to stop state tax laws at all.) Strangely, Scalia, Kennedy, and Thomas did not join Part IV of the Court’s opinion, the part inviting Congress to act.
Aside from Kennedy and Thomas, Justice Gorsuch is the only justice to have directly ruled on this matter previously. When he was on the Tenth Circuit, he wrote a concurring opinion in DMA v. Brohl, where he described Quill as contentious and warned about judges mindlessly following precedent, and that Quill perhaps should have been considered “an expiration date” for physical presence.
Three other cases give extra insight into what the justices might do.
The first case is Kentucky v. Davis (2008), upholding Kentucky’s tax credit for investing in Kentucky bonds but not other states’ bonds. Justice Souter wrote the plurality opinion, joined by Justices Stevens and Breyer and mostly by Chief Justice Roberts and Justice Ginsburg. They held that there was reason to believe the tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. was not motivated by protectionism but rather reducing borrowing costs, that most states do it, and that it’s no different from a private bondholder pricing its own bonds differently. (That’s the part Roberts and Ginsburg declined to join, with Roberts writing that he thought that was so obvious that further discussion beyond citing a previous precedent was unwarranted.) Scalia concurred, rejecting the dormant Commerce Clause but grudgingly going along with it for stare decisis reasons. Thomas dissented, rejecting the dormant Commerce Clause. Kennedy and Justice Alito dissented, holding the Kentucky scheme as discriminatory and rejecting the argument that they’re like any other bond issuer since this involves not bonds but tax credits.
The second case is Armour v. City of Indianapolis (2012), where the Supreme Court upheld sewer assessments against an equal protection challenge. The city did an improvement and then offered 180 homeowners a choice of paying it up-front as a lump sum or through installment payments over several years. Thirty-eight paid the lump sum; the rest went with installments. The next year, the city forgave all future installment payments. The 38 lump sum people asked for a pro rata refund and were refused. They sued.
Roberts, Scalia, and Alito said the homeowners should win. They cited a number of equal protection cases requiring rough equality of tax treatment when taxpayers are in the same class. Here, some homeowners paid $9,278 (the prepaid ones) while others paid as little as $309.27. They noted the city had choices to rectify the “gross disparity” but chose instead to violate state law and the federal Constitution, for no real reason, thus failing rational basis review.
But they were the dissenters. The Court majority (Breyer, with Kennedy, Thomas, Ginsburg, and Justices Sotomayor and Kagan) said the city could classify however it wants, and since there’s no violation of fundamental rights or suspect classes, the city has wide latitude to do whatever it wants.
The net of this is Breyer, Kennedy, Thomas, Ginsburg, Sotomayor, and Kagan not being particularly outraged by inequitable state tax practices outside of clear precedent. Roberts and Alito, in turn, were not willing to take the stated purpose of the tax policy at face value.
The third case is Maryland v. Wynne, which invalidated Maryland’s practice of giving a full tax credit for in-state investments but only a partial tax credit for out-of-state investments. Legal scholars who wrote amicus briefs viewed it as pretty open-and-shut unconstitutional under the dormant Commerce Clause. But the Supreme Court’s opinion was close: 5-4, and an unusual 5-4 at that. The majority (striking it down) was Alito, Roberts, Kennedy, Breyer, and Sotomayor; the dissenters were Scalia, Thomas, Ginsburg, and Kagan. Scalia and Thomas dissented because they disagree with the dormant Commerce Clause. Ginsburg and Kagan, similar to their positions in Armour, simply accepted the government’s arguments at face value without too much worry for burdens or negative impacts or discrimination.
Taking the three cases together, this is my cheat sheet:
ROBERTS: Fan of narrow decisions that don’t venture much beyond the case at issue, but evidence of disparate treatment can catch his attention.
KENNEDY: A discriminatory effect seems to rile him, further evidenced by his criticism of Quill in his DMA concurrence.
THOMAS: Doesn’t think the courts can strike down state laws on commerce clause grounds absent congressional authorization. But if you can make an Import-Export Clause argument…
GINSBURG: In three of three cases, upheld the challenged state law with little credence given to challengers’ arguments.
BREYER: Wild card (was in Wynne majority striking down the state law, but in Armour and Davis majorities upholding it).
ALITO: Champion of the Commerce Clause and foe of states burdening interstate commerce with their taxes. Interestingly, that means he could try to preserve Quill, or join a narrow ruling upholding South Dakota but not what other states are doing.
SOTOMAYOR: Wild card (was in Wynne majority striking down the state law, but in Armour majority upholding it).
KAGAN: Will uphold the state law.
GORSUCH: Same as Thomas? Or will Alito pick him up?
Likely to uphold the state law: Kennedy, Thomas, Ginsburg, Kagan, Gorsuch
Might join a narrow majority: Roberts, Alito
Let’s see what they say at oral argument: Breyer, Sotomayor
The eminent website SCOTUSblog also has a breakdown of the case.
The case is South Dakota v. Wayfair, Inc., No. 17-494.
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